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Pronouncement explaining transfer pricing principles on right of TPO to collect info u/s 133(6), exclusion of high profit comparables, adjustment for limited risk environment, exclusion of reimbursement costs for computing operation margins

Court :
ITAT Hyderabad

Brief :
HSBC Electronic Data ProcessingIndia Private Limited (hereafter referred to as ' HDPI ') is awholly owned subsidiary of HSBC Holdings Plc (together with its associates referred to as 'HSBC Group'). During the course of assessment, the TPO after obtaining information from the company u/s 133(6) of the act, the TPO treated it as comparable by observing that the company is engaged in IT enabled services and qualifies all the filters adopted without giving the assessee an opportunity/information to examine the comparability. Held that before utilising the information obtained, he has to give fair opportunity to the assessee. Also held that company showing extraordinarily high profit cannot be treated as comparable and have to be excluded. Assessee seeked adjustment for risk being taken by comparable since it was operating in a risk mitigated environment vis-à-vis the comparable companies performing entrepreneurial risk taking functions whose profit would be more dependent on the risk involved. Also held that reimbursement transactions though international transactions towards travel, air fare and site expenses relating to employees of AE travelling to India for business purposes are to be excluded for working out the operative costs/operative margins.

Citation :
HSBC Electronic Data Processing India P. Ltd. – Appellant – Versus – ACIT - Respondent







Assessment Year 2008-2009

HSBC Electronic Data

Processing India P. Ltd.,

Hyderabad – 500 081.




The ACIT, Circle 2(2)

Hyderabad – 500 004.


For Assessee :Mr.RajanVora

For Respondent :Mr. D. SudhakarRao

Date of Hearing: 03.09.2014

Date of Pronouncement: 24.10.2014



This appeal is preferred by assessee against the order of AO dated 20-09-2012 passed under Sec 143(3) read with Sec.144Cof the IT Act 1961 consequent to the directions of Disputes Resolution Panel, Hyderabad dated 30.08.2012 for the A.Y. 2008-09.

2. Briefly stated, HSBC Electronic Data Processing India Private Limited (hereafter referred to as ' HDPI ') is a wholly owned subsidiary of HSBC Holdings Plc (together with its associates referred to as 'HSBC Group'), one of the leading banking and financial services organisations in the world. HDPI provides a range of back office services including contact centre, data entry, data processing and related services(together referred to as 'BPO services') to its Group companies/Associated Enterprises ('AE') across the globe. The Asseessee's service centres are registered as a 100% export oriented unit under the Software Technology Parks of India(STPI') scheme. Assessee has also established a branch in the UK to facilitate the identification and effective migration of work to India from AEs. The assessee renders services as a captive contract service provider and is remunerated on a cost-plus mark-up basis for providing the services to its AEs. Assessee had filed return of income for the Assessment Year2008-09 on September 25, 2008 disclosing a taxable income ofRs.65,76,218 after claiming deduction u/s 10A of the Income Tax Act, 1961 in respect of the profits from export of services from the STPI units and admitting a taxable income ofRs.107,48,10,745 under MAT.

3. During the course of assessment proceedings, The ACIT Circle-2(2) (herein after referred as 'Assessing Officer' or'AO') selected the case for scrutiny assessment and issued anotice u/s 143(2) of the Act, and further made a reference u/s92CA(1) of the Act to the Learned Additional Commissioner of Income-tax (Transfer Pricing) (herein after referred as'Transfer Pricing Officer' or 'TPO') for determination of Arm'sLength Price (,ALP') of the international transactions with AEs.

4. The international transactions of Asseessee with AEs during the year are as under :

- Provision of BPO services – Rs.1249,63,10,000;

- Reimbursements to AEs – Rs.61,02,49,716;

- Reimbursements by AEs – Rs.26,67,67,677;

- Payment of bank charges – Rs.50,85,988;

- Payment of Guarantee commission – Rs.15,174; and

- Interest received on Fixed deposits – Rs.72,64,021.

For the purpose of establishing the ALP of its international transaction with AE, the assessee had undertaken a transfer pricing study, carried out by an independent external consultant, in accordance with the provisions of the Act, read with the Income-tax Rules, 1962 ("Rules"). A detailed analysis was undertaken to determine the functions performed, risksassumed and assets utilized by the assessee and its AEs in respect of the international transactions between them. Based on the transfer pricing study, it was concluded that the international transactions of the assessee with AEs are at arm's length.

5. The key features of the Transfer Pricing ('TP') studyundertaken in respect of international relating to provision of BPO services are summarised below :

- As per the functional analysis, assessee was categorised as a risk mitigated contract service provider and selected as the tested party ;

- Transaction Net Margin Method ('TNMM') was determined as the most appropriate method to determine the ALP ;

- The search was conducted on Prowess database and Capitaline database to select comparable companies('comparables');

- Operating margin i.e. operating profit/operating cost was selected as the Profit Level Indicator (PLI') for the purpose of determining ALP;

- Given the nature of the international transaction under review, economic conditions, differences in business or product life cycles and other similar factors and also the fact that audited financial data for the AY 2007-08 was not available in all cases, financial data of AY 2006-07 and AY 2005-06 was also considered, along with interim/unaudited

- The economic analysis yielded a set of 7 comparables with weighted average arithmetic mean of 13.30 %.

- There were functional and risk differences between the assessee and the comparables. However, no adjustments were undertaken in the TP report, since,the assessee’s net margin from the provision of services to its AEs (13.30%) during the year was within the arm's length range determined.

6. There were series of submissions made by assessee before the TPO in response to the notices, to justify the arm's length nature of its international transactions. While the TPO accepted TNMM as the most appropriate method and the PLI(operating profit/Operating cost) adopted therein, he rejected the economic analysis undertaken by assessee in the TP documentation inter alia stating that the multiple year data has been used and the comparability analysis is defective. TPO conducted a fresh search on the databases (i.e., Prowess and Capitaline) during the assessment proceedings. TPO used powers u/s 133(6) of the Act to obtain selective information from certain companies and used the same for determining the ALP. TPO applied the following additional filters for comparative analysis:

a) Rejection of companies having different financial year;

b) Rejection of companies having diminishing revenues filter/persistent loss making;

c) Rejection of companies having related party transactions in excess of 25% of revenue ; and

d) Rejection of companies having foreign exchange earnings less than 25% of revenue.

7. The TPO has selected 20 companies as comparables with average margin of 29.26% after making a negative working capital adjustment of 0.10%. TPO also added the reimbursement related to travel costs received by assessee to the operating cost for determination of ALP. Accordingly, TPO made the TP adjustment of Rs.87,70,17,393 to the price received by assessee for the services rendered to its AEs. AO adopted the same in his draft assessment order u/s 143(3)read with 144C( 1) of the Act ('Draft Order') dated : November24, 2011 proposing additions to the total income. Further AO reduced foreign exchange gain of Rs 20,29,39,202 from business profits and communication charges of Rs 1,38,24,765from the export turnover, for the purpose of computing deduction u/s. 10A in applying the prescribed formula.

To read the full judgment, please find the attached file:

Attached file:$5%5E1REFNO1647_



Hetvi Sheth
on 29 October 2014
Published in Others
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